"The least expensive kilowatt, is the one not used."

- Jacob Goldman

The HVAC Tax Aspects of Post-Internet Retail Stores

The U.S. Retail sector is rapidly converting from hard goods sellers in dry
stores to service businesses requiring enhanced HVAC. HVAC is expensive and
inefficient HVAC measurably increases operating costs. Retail category
landlords and service business tenants need to carefully consider energy
efficient HVAC design when designing and purchasing new and replacement HVAC
products. Numerous categories of energy efficient HVAC are eligible for EPAct
tax incentives.

The EPAct Section 179D Tax Opportunity

Pursuant to Energy Policy Act (EPAct) Section 179D, building owners and
tenants making qualifying energy-reducing investments in their new or existing
locations can obtain immediate tax deductions of up to $1.80 per square
foot.

If the building project doesn't qualify for the maximum EPAct Section 179D
$1.80 per square foot immediate tax deduction, there are tax deductions of up
to $0.60 per square foot for each of the three major building subsystems:
lighting, HVAC, and the building envelope. The building envelope is every item
on the building’s exterior perimeter that touches the outside world
including roof, walls, insulation, doors, windows and foundation.

Post-Internet Leading Retailers

We are all familiar with the total demise of many major hard goods
manufactures including Circuit City for electronics, Linens and Things for
household goods, and Borders for books. These products are increasingly
purchased on line and the remaining retailers in these categories are also
shrinking their selling spaces.

The Shrinking Dry Goods Retail Sector

Numerous dry goods retailers have recently announced systematic store
closings. For example, Abercrombie & Fitch will close 180 stores by 2015,
Blockbuster is to eliminate 300 stores, Barnes & Noble will close 200
locations (20 per year over 10 years), and Sears will close 62 locations.

Radio Shack will be closing 450 to 550 locations, Game Stop will get rid of
500 to 600 stores, and pre-merger Office Depot indicated they will close 125 to
150 locations and Office Max will be closing 150 to 175 locations.

Medi Clinics

This already growing retail category is on the rise as pharmacies branch out
into healthcare services. Rite Aid plans to open 58 locations with in-store
medical clinics that will use web cams to provide virtual doctors. Rite Aid
executive Robert Thompson says “Health care in the future is certainly
going to require a multifaceted approach”, he adds the virtual medical
clinics are “a very efficient way to bring acute-care services to a
pharmacy”.4

CVS’s chief healthcare officer, Helena Foulkes, says “We have
to reinvent pharmacy”. CVS announced in December 2012 that there would
be acceleration of MinuteClinics openings, from 100 per year to 150. CVS will
have over 1,500 MinuteClinics by 2017. Medi clinics should utilize more
advanced HVAC systems with more frequent ventilation air changes.

Energy Efficient Retail HVAC Technologies

The HVAC categories that typically qualify for the EPAct tax incentive
include:

1. Coolerado units5 (In the south and western portions of the
U.S.)

2. VRF6

3. Energy Recovery Ventilation

4. VAV in buildings less than 75,000 square feet

5. Chillers in buildings less than 150,000 square feet

6. Geothermal7

7. McQuay bearingless chillers8

8. Thermal Storage9

9. Very efficient package units

Long standing shopping mall and shopping center owners are often not
familiar with today’s high energy efficiency HVAC equipment and tenants
will often need to request and negotiate upgrades if they want to manage their
operating costs.

Conclusion

The retail sector is going through a major dry goods to replacement retailer
transformation where typically more HVAC is required. Knowledge of highly
efficient HVAC technologies can reduce tenant operating costs while utilizing
tax incentives.